Path to Housing Recovery Paved With Foreclosures

Many U.S. cities where home values have taken a double-digit drop have seen their sales rise by a similar measure as foreclosed homes -- usually a sign of market distress -- are sold off at a discount, paving the way for a recovery.

AP

Many homes in such regions were seized by banks and are, in industry jargon, 'real estate owned' or REO properties that have had their prices slashed when put back on the market.

"In this market, there are so many REOs that the banks are getting their clocks cleaned," said Mark Partipilo, a prospective Las Vegas real estate investor.

On a tour of the brown lawns and bare windows of foreclosed properties in southern Nevada, Partipilo said he smelled opportunity.

"This might not be the bottom, but waiting six months might be too late," said the 36-year-old Chicago native. A deep nationwide downturn in sales, prices and housing construction has pushed the economy toward recession. However, some hard-hit cities are now seeing a strange whiplash of sinking values and rising sales.

Deflated prices are enticing first-time buyers and investors who want to pick over homes on which banks are willing -- if somewhat reluctantly -- to take a loss in a 'distress sale'.

"Banks that are not in Disneyland recognize that these sales are the reality today," said Denny Grimes, a real estate agent in the Gulf Coast city of Ft. Myers, Florida.

SINKING VALUES, RISING SALES

Home prices have fallen at least 15 percent from a year ago while sales have seen an uptick of more than 20 percent in Las Vegas and Ft. Myers as well as in Riverside, California which also tasted housing boom and bust.

Around Riverside, single-family home prices are off 35 percent in May from their year-ago levels while the sales pace is up 79 percent. Local agents say almost all of those sales are REO.

"Everybody thinks bank-owned properties are the best deals," said Gene Wunderlich, the head of a local real estate agent trade group. "If you are not buying REO properties, you are probably not buying anything at all."

Ironically, such housing markets may now be primed for a recovery.

"Markets where a large share of homes are heavily discounted because of REO sales, they may be seeing a bottom," said Cynthia Kroll, an economist and real estate market scholar at the University of California, Berkeley.

FORECLOSURE MEDICINE

Realtors in Las Vegas say 2007 was a lost year, with the sales market frozen by timid buyers who were discouraged by miserly sellers who would not budge on the price.

The forced sales that dominate the market today are a distasteful but effective way to bleed off the housing overstock, said Robin Camacho, who recently guided Partipilo and his wife on their real estate tour.

"We are clearing out some inventory," she said. "When these REOs get sold, then people can start selling their own homes."

In a normal market, real estate brokers would turn their backs on the red tape, uncertainty and lower margins of a forced sale but today, such transactions are bread and butter for many agents.

One-third of homes on the market in Ft. Myers are priced below their last sales price, meaning lenders will take a loss in a 'short sale' or else push the home into a costly foreclosure.

"Three years ago there was no such thing as a short sale in this market," said Grimes.